Timmy elsewhere

At the ASI.

For the weak of mind: no, futures speculation really doesn’t push up spot prices.

10 thoughts on “Timmy elsewhere”

  1. The speculators do however make money out of this otherwise “zero sum” activity. After covering their costs. If they didn’t make money on it they would stop doing it – eventually the laws of arithmetic would force them to stop doing it. Who, therefore, bears the incidence of this money-making? Is it the agricos that hedge, or some combination of their shareholders, workers, and customers?

  2. If people are trading in derivatives rather than buying the underlying stocks then the upward price pressure on the underlying stock is reduced due to less demand. You might even say that derivaives make the prices more stable as the speculation money is elsewhere.

  3. @jamesV
    All speculative deals have to be speculative on both sides. For a speculator to buying, expecting a rise, there has to be another speculator expecting there wont be. if all speculators expected a rise, there wouldn’t be any sellers at the price.

    If agricos hedge, they (including ” some combination of their shareholders, workers, and customers”) receive the benefit of that hedging.

  4. I grok the whole “speculation isn’t profiteering from the starving” thing, but maybe need a more technical explanation. Yes we have speculators and hedgers, both participate voluntarily (even if the speculators – who of course will back a mix of short and long positions -are 80%+ of the market). However, there is a net money flow from the hedgers to the speculators. Without it the speculators would shut up shop. Sure, the hedgers must think their market participation value for money or they wouldn’t. But we still have that money flowing from producers (ultimately consumers) to speculators.

    That makes the whole game a really easy target, along the lines of : “why can’t we achieve the same thing without money going from consumers pockets to the pockets of overpaid bastards in banks and hedge funds”? It’s a good question that deserves a better answer than “studies have shown”.

  5. You have to be careful in drawing conclusions from the observation that derivatives net to zero. Often, if one side is speculative the other will be hedging. So speculative trading will feed into the spot price. This is particularly true in share prices – S&P futures trading drives the spot level. Furthermore, if speculators buy options, that makes the spot price more volatile, because the option sellers are hedge players who buy when the price rises and sell when it falls.

    Of course Tim is right that in the case of commodities, this activity would have to show up somewhere in inventory (or in changes in production).

    My view is that speculation in the futures market in commodities is generally desirable, because it provides a mechanism to incorporate expectations of future supply and demand in present pricing.

  6. @PaulB, futures trading is defended on the basis that it really does influence production. This has to feed through to spot prices, Investors foresee a shortfall, buy futures pushing the price up, then producers react to the increased price by making more.

    This might mean that the current spot price is not influenced by current speculation but is influenced by past speculation. Which leads to the perverse (but possibly accurate) conclusion that speculators supposedly forcing up the future price of the poor’s food are actually reducing it by pushing the price up, thus increasing supply while not actually increasing (real) demand.

  7. The hedgers are basically buying insurance from the speculators. If that is immoral, we’re all f…

  8. JamesV

    I think BiF sums it pretty succinctly actually.
    There could in theory be a feed through from futures to spot price. Yes, it is possoible I suppose that a rising futures price could initiate an increased output, which would have the begin contrary effect of pushing the spot price down over time. It is, I would have thought, more likely, however, that increases in futures price leads to a substitution effect – Special K 3 Grains – which again is really a benign effect.
    Overall, however, the derivatives markets would seem to work, exist, because one party increases its utility by increasing certainty, trading its chance of a profit in return, whilst the other’s utility is increased by taking on that risk and trying to maximise profit.
    Thus the net zero sum is only if viewed purely numerically.

  9. The insurance model of a futures market only describes the net position. Most speculators go bust in the end. (Salomon Bros, etc.) A few get filthy rich and attract the attention of the imbeciles Tim points to.
    Most hedgers are insiders (some of them even turn a profit!) so in sum the insurance premium is probably unnaturally low, for most of the time.

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